Will Emerging Economies Repeat the Environmental Mistakes of their Rich Cousins?

Developing countries must not wait as long as advanced countries did to address the environmental effects of rapid economic growth. Market signals can help curtail environmental damage at minimum cost to growth.

Rapid growth in the major emerging markets has been accompanied by severe environmental degradation, resulting in widespread illnesses and likely millions of premature deaths. Although greater resources will probably be devoted to improving the environment as incomes rise, the damage done may become unacceptable well before then.

Absent dramatic changes in policy to improve the trade-off between growth and environmental deterioration, emerging markets will face ever-increasing environmental consequences that will eventually constrain growth. Penalties and administrative controls are in some cases necessary to prevent the destruction of essential resources. However, greater reliance on taxes, subsidies, and appropriate pricing to encourage efficiency in the use of raw materials, and to reduce the pollution resulting from both production and consumption, would achieve environmental improvements at a minimum cost to growth.

Growth in the BRICs—a double-edged sword

Rapid growth in Brazil, Russia, India, and China (the BRICs) has dramatically reduced poverty and provided essential support for the global economy during the recent crisis. However, the BRICs are repeating the past mistakes of advanced countries, where industrialization was accompanied by severe degradation of the environment that was not seriously addressed until relatively high income levels were reached. An example with critical international implications is climate change, with the BRICs becoming increasingly responsible for global carbon emissions (for a discussion, see Juggernaut by Uri Dadush and the present author).

But even leaving aside global issues such as climate change, the cost of domestic environmental deterioration can be staggering. Researchhas shown that air and water pollution contribute to numerous ailments, particularly respiratory illnesses, cancer, and breakdowns in the immune system. Pollution also destroys natural resources required for production, for example, degrading soil and water so that they can no longer be used in agriculture.

Quantifying these costs, particularly in developing countries, is bedeviled by limited data, problems in identifying a distinct relationship between environmental issues and specific health problems, and the difficulty of assigning an economic value to health and life. Nevertheless, information from various studies underlines the huge costs paid by developing countries:

A rough estimate of the fine particulate matter in China’s atmosphere averages three times the level deemed unsafe by the World Health Organization (WHO), and 350,000–400,000 Chinese die each year from illnesses related to outdoor air pollution.

More than half of China’s cities are affected by acid rain, and 40 percent of major rivers are so polluted that their water can only be used for industry or landscaping.

Russia’s more than 90 billion tons of solid waste covers 618,000 acres of dump sites, and 90 percent of state-approved sites for waste storage do not meet safety standards.

Some 22,000–28,000 deaths in people over the age of thirty in Russia may be due to road-transport-related emissions.

The WHO estimates that outdoor air pollution in India causes 527,700 deaths a year.

Will higher incomes eventually reduce environmental degradation?

Industrialization initially increases the exploitation of raw materials as well as the use of waterways and air as repositories for industrial waste. Moreover, since incremental additions to income are more important at lower levels of income, poor countries are often less willing than rich countries to sacrifice current income to improve the environment.

Eventually, however, higher incomes can help reduce environmental problems (an outcome suggested by the environmental Kuznets curve—see figure). Technological progress can reduce the energy intensity of output, the reliance of industrial processes on raw materials, and the air and water pollution resulting from industrial production. Rising incomes also increase the demand for a better environment and the resources available to achieve it. And as incomes rise, the sectoral composition of output tends to shift towards services, which often involve fewer raw material inputs and less pollution than manufacturing. With the major exception of Brazil, most large emerging markets are understandably ranked well below advanced countries on Yale’s 2012 Environmental Performance Index, which is one indicator of the link between the environment and income level.

Unfortunately, one cannot rely on rising incomes alone to eventually achieve a cleaner environment in emerging markets, for three reasons. First, empirical evidence on whether the environmental Kuznets curve is a useful, general description of the impact of growth on the environment is mixed, and studies attempting to show a unique relationship between growth and pollution are conflicting and weak. The relationship between income levels and environmental deterioration is no doubt conditioned by a country’s circumstances and policies.

Second, it is unclear at what point rising incomes in emerging markets are likely to slow environmental damage. For example, one measure of water pollution is estimated to begin improving when countries achieve a per capita income of $20,000—almost five times China’s income level in 2010.

Third, even if the pace of environmental damage is now slowing, the stock of environmental resources may be nearing exhaustion. This stock should not be thought of as entirely fixed, as determined efforts can restore environmental quality. But increasing the availability of clean air and water is a slow and costly process. For example, it is estimated that China would have to spend 2 to 4 percent of its GDP each year to clean up the industrial waste left after three decades of rapid development. Emerging markets are using up their resources much more rapidly than they are being refurbished. And some resources are indeed fixed. For example, by the time that increased productivity makes it unnecessary to continue expanding the amount of land devoted to agricultural production in the Brazilian rainforest, much of the remaining biodiversity may be irrevocably destroyed.

The environment may get a lot worse before it gets better

If history is any guide, the prospects for radical steps to improve environmental sustainability at the cost of growth are poor. Today’s advanced countries endured enormous damage to their air and water systems as their industrialization progressed, and governments proved understandably reluctant to shutter factories and throw masses of people out of work to achieve environmental goals. Determined efforts to address the environmental consequences of growth often waited until wealth was sufficiently high and technology sufficiently advanced to achieve cleaner production at minimal costs. For example, smog often obscured London’s streets throughout the nineteenth and early twentieth century, and is believed to have been responsible for numerous deaths, but little was done to address it until the dramatic smog attack of 1952.

It remains unclear whether developing countries will be able to wait until they have reached much higher income levels before addressing their severe environmental problems. It is true, however, that developing countries have relatively low-cost access to less-polluting technologies, while advanced countries had to shoulder the cost of developing new technologies. Thus the BRICs face a less difficult tradeoff between rapid growth and environmental destruction than Britain and the United States did.

Policies are critical for reducing environmental deterioration at minimal cost to growth. There is an urgent need for more information on both the environmental implications of production decisions and the health implications of environmental deterioration. Understanding how specific industries may be causing hundreds of thousands of deaths a year is central to making intelligent choices on environmental policies.

Administrative systems need to be more impartial and efficient in considering environmental tradeoffs. For example, while on paper China has strong laws protecting the environment, at the provincial level many layers of administration, conflicts of interests created by, for example, local government ownership of polluting factories, and corruption severely weaken the effectiveness of these laws.

Finally, imposing limits on pollution by administrative fiat may be necessary to avoid the destruction of critical resources and to place the state’s moral authority behind pollution controls. Nevertheless, economic incentives—including the taxation of pollution-intensive activities, subsidies to encourage more energy-efficient production and consumption, and appropriate pricing of common resources—tend to be more effective than controls in improving the tradeoff between growth and environmental damage. For example, it may be necessary to prosecute the managers of firms that knowingly dump raw sewage in a city’s drinking water supply. But it is perhaps even more important to set the price for water use at a level that reflects its true scarcity.

Advanced countries can play a useful role in helping developing countries tackle their environmental problems, for instance by facilitating the transfer of clean technology and providing funding for environmental projects. Helping developing countries to clean up their domestic environments could also be a step towards addressing global environmental challenges, most importantly climate change.

Given their low incomes, emerging markets are unlikely to severely constrain growth in order to curtail environmental damage. Thus, efforts to address domestic environmental challenges may not significantly threaten global recovery over the next few years. Developing country residents will meanwhile have to bear the burden of environmental degradation. And at some point they, along with the global economy, will likely have to pay the piper.

William Shaw is a visiting scholar in Carnegie’s International Economics Program.

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About the International Economics Program

The Carnegie International Economics Program monitors and analyzes short- and long-term trends in the global economy, including macroeconomic developments, trade, commodities, and capital flows, drawing out their policy implications. The current focus of the program is the global financial crisis and its related policy issues. The program also examines the ramifications of the rising weight of developing countries in the global economy among other areas of research.

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